Earnings Call Transcript - ENVX Q4 2021

Operator, Operator

Thank you for standing by and welcome to Enovix Corporation's Fourth Quarter and full-year 2021 Earnings Conference Call. Currently all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. As a reminder, today's program will be recorded. It is now my pleasure to introduce your host for today's program, Charles Anderson, Vice President of Investor Relations. Please go ahead, sir.

Charles Anderson, Vice President of Investor Relations

Thank you, everyone, and welcome to Enovix Corporation's fourth quarter and full-year 2021 results conference call with us today are President, Chief Executive Officer, and Co-Founder Harrold Rust, and Chief Financial Officer, Steffen Pietzke. Harrold and Steffen will review the operating and financial highlights, and then we will take questions. After the Q & A session, we'll conclude the call. Before we continue, let me remind you that we released our Q4 and full-year 2021 shareholder letter after the market closed today. It's available on our website @ ir.enovix.com. A replay of this conference call will be available later today on the investor relations page of our website. Please note that the shareholder letter, press release, and this conference call all contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are based on current expectations, and may differ materially from actual future events or results due to a variety of factors. For a discussion of factors that could affect our future financial results and business, please refer to disclosure in today's shareholder letter and our filings with the Securities and Exchange Commission. All our statements are made as of today, March 3rd, 2022, based on the information currently available to us. We can give no assurance that these statements will prove to be correct and we do not intend and undertake no duty to update these statements except as required by law. During this call, we will also discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of these non-GAAP financial measures to the GAAP financial measures in our shareholder letter, which is posted on the Investor Relations page of our website. I will now turn the call over to Harrold Rust to begin.

Harrold Rust, President & CEO

Thank you, Charlie. Good afternoon to everyone. We're looking forward to updating you on our progress today. We do so with a heavy heart given the current situation in Ukraine. Our thoughts are with those affected by the ongoing conflict, including our employees from Ukraine, and those with friends and family from the area. While Enovix does not currently have direct business ties to the region, today, we are thinking of the people at Amphenol Airline, a Ukrainian airline who helped us deliver critical factory equipment from Asia to San Francisco in the spring of 2021 to mitigate supply chain disruptions. Without this hardworking crew from Ukraine, we would not be where we are today. We remain grateful for their assistance and our thoughts are with them, their families, and their loved ones during this difficult time. 2021 was quite a year for Enovix. One that validated the technical and commercialization strategy we have pursued since our founding. We entered 2022 with ever-increasing demand for our batteries, which we believe offers the highest energy density for the mobile computing market. And most importantly, we are on track to begin commercializing in the coming months. Our shareholder letter, posted on our website details our accomplishments in 2021 and our focus for 2022. Let me call out some of the highlights here, then Steffen will do a review of the financials. After that, we'll take your questions. In January, we began shipping production qualification samples from our automated production line at Fab-1 in Fremont to customers. By doing so, we continue to expect to recognize first product revenue in the second quarter of 2022. Hitting this significant milestone will distinguish us from competitors who claim technology breakthroughs but are years away from commercialization. I want to thank our entire team and especially our operations group for bringing up our first line at Fab-1. It was by no means an easy task. Indications of demand for our battery remain well above what we can supply for several years. Our revenue funnel increased by roughly $200 million sequentially in Q4 2021 to $1.5 billion. End markets and applications continued to be broad-based, but we would highlight the incremental contribution to the revenue funnel from new industrial applications and new engagements in Asia as a result of additional resources we are devoting to the region. The speed by which we can capture this demand comes down to how fast we can qualify customers, improve our manufacturing process, and bring on capacity. We have generated a tremendous amount of learning from bringing up our initial production line and immediately fed this into designs for our next-generation equipment. These designs will enable lines that are faster, smaller, more energy-efficient, and ultimately lower cost. First, in response to increased customer engagement and demand for custom cell designs, we will soon order a next-generation pilot line based on these learnings in order to speed customer qualification. Second, we also plan to order in the coming months, the first of our next-generation production lines based on these same learnings. This line will allow us to bring additional capacity online for revenue by the middle of 2023. It has long been our view that the proper time to scale up is when we have optimized our manufacturing process and believe our next-gen lines give us the best opportunity to do just that. Our shareholder letter also details important third-party validation. Notably, we were an Innovation Award Honoree at the Consumer Electronics Show in January. Quite an achievement considering the 1800 products evaluated by an elite panel of judges. We further strengthened our balance sheet with the redemption of our outstanding public warrants, which has added another $130 million. Last, I'm pleased to announce two recent data points that demonstrate our progress in commercializing our battery for the electric vehicle or EV market. Today we are announcing the addition of Patrick Donnelly as Vice President of Strategic Business Development, focused on EVs. Pat joins us from Samsung SDI, where he led a commercial team that secured several multi-billion-dollar contracts for lithium-ion batteries with both established auto OEMs and emerging EVOEMs. Also, today in our shareholder letter, we are showing updated progress on our Department of Energy program to demonstrate our 3D architecture and 100% active silicon anode with an EV-class MC cathode. As many of you know, low cycle life is one of the killer problems that has held back the adoption of 100% active silicon anodes. We believe the Enovix 3D architecture uniquely solves this problem and we are happy to report that these cells are approaching 800 cycles and only have lost 4% of their capacity. These are very encouraging and exciting results, and we look forward to updating you as they progress. Please be sure to read our shareholder letter for more details on these significant achievements. Now, I will turn the call over to our CFO, Steffen, who will discuss our financials.

Steffen Pietzke, CFO

Thank you, Harrold. All our detailed financials can be found in our shareholder letter. So I will spend my time covering a few high-level topics. We closed the first quarter of 2021 with net cash of $385.3 million, which does not include the incremental $52.8 million of cash we received in January from the remaining exercise of our public warrants. Turning to the fourth quarter results, we did not recognize product revenue in the quarter. Consistent with our expectations. As Harrold mentioned, we continue to expect to begin recognizing product revenue for the sale of our batteries in the second quarter of 2022, consistent with our previously reported goal. Our operating expenses in the fourth quarter were $24.8 million, excluding stock-based compensation, our non-GAAP operating expenses in the quarter were $20.8 million up from non-GAAP operating expenses of $16.2 million in the third quarter of 2021, which also excludes stock-based compensation. The sequential increase was the result of our efforts to scale up the business for manufacturing and commercialization, to meet demand from our customers. Turning to the full-year 2021 results, we used $95.3 million of free cash flow, which included $43.6 million of capital expenditures. Cash usage came in below our forecast of $110 million to $120 million due to the timing of equipment payments, some of which slipped into early 2022. Now, let's discuss our expectations for 2022. As noted earlier, we expect to recognize our first product revenue in Q2 2022. For full-year 2022, we expect to generate revenue between $6 million and $12 million. We expect that our revenue will consist of both product revenue and non-recurring engineering or NRE service revenue. Keep in mind that in addition to producing cells for product revenue, our alliance will also be heavily occupied this year, producing qualification samples to support future revenue ramps. For full-year 2022, we expect to use between $190 million and $210 million of cash, of which we expect roughly 55% will be capital expenditures. As Harrold mentioned earlier, we are bringing on a next-gen pilot line in 2022 to respond to the need for increased customer qualifications. We are also continuing to build our Fab-1 and will order our next-generation production line. Not surprisingly, like the rest of the industry, we're not immune to the inflationary pressures impacting battery production equipment given the surge in demand for lithium-ion batteries. To summarize, we entered 2022 with a very strong balance sheet and are investing to commercialize our groundbreaking 3D battery architecture, which uses a 100% active silicon anode. We are focused on executing our plan, which we believe will drive shareholder value. I will now turn it back to Harrold for closing remarks.

Harrold Rust, President & CEO

Thanks, Steffen, to recap, we made outstanding progress in 2021. We are now building and shipping batteries to tier-one customers. In 2022, our priorities will be responding to a growing customer base, driving transformative product enhancements, and improving our manufacturing process based on the learnings from Fab-1. With that, we are ready to take your questions.

Operator, Operator

Thank you. Our first question comes from Colin Rusch with Oppenheimer. Your line is open.

Colin Rusch, Analyst

Thanks so much, guys. Now, can you talk a little bit about the number of customers you've gone through the full qualification on for moving into the design and sales? And then I have a follow-up question around capacity expansion.

Harrold Rust, President & CEO

Yeah, Colin, thanks for that question. This is Harrold. We've shipped our qualification samples for our first customer, and we're working on qualification samples for others right now. As we mentioned in the comments earlier, we expect to start recognizing revenue from one of those customers in the second quarter of '22.

Colin Rusch, Analyst

Okay. And then talk about the capacity expansion, but clearly demand is running at a pretty healthy clip. I'm curious about your thoughts on potentially doing slightly larger facility as you've decided on this next phase and how far along you are in terms of identifying that location and potentially entering into a lease, could you talk about.

Harrold Rust, President & CEO

Thank you for your comment. We are experiencing a growing demand for our product across both products and customers, and we aim to convert that into revenue as quickly as possible. We are considering whether to establish a global footprint for manufacturing and are currently assessing both domestic and international locations for this purpose. Additionally, our first production line has provided invaluable insights that are allowing us to design more efficient next-generation lines in terms of throughput, capital, and space. We are focused on the best way to advance the company and expand, which will influence the type of facility and its location. We are actively collaborating with a leading real estate firm that specializes in manufacturing sites. We have been working on this for quite some time and have submitted letters of intent on several potential properties. Stay tuned for updates as we expect to move forward soon with our first next-generation line and announce its location.

Colin Rusch, Analyst

That's super helpful. Thanks so much, guys.

Operator, Operator

Thank you. Our next question comes from Anthony Stoss with Craig-Hallum. Your line is open.

Anthony Stoss, Analyst

Hey, guys. Harrold, I'm curious with the new process that you identified. You've talked about it being more efficient, faster, etc. Will that raise the potential revenue in plant 1 when it's up and operational and cranking? And then follow-up question, you have the 35 customers that you highlighted your sample to. How much is that up from the last quarter? And can you give us a sense of what markets, is there any new markets that you're sampling into?

Harrold Rust, President & CEO

Thanks for the question. Could you please repeat the first question?

Anthony Stoss, Analyst

Plant 1 capacity.

Harrold Rust, President & CEO

Regarding Plant 1 capacity, I believe that if the new lines are more efficient in terms of space utilization, it opens up opportunities for us to increase capacity if we choose to do so. We are considering where to allocate capacity more broadly in relation to our customers' locations. This means we might opt to expand capacity at this site or decide to invest in another location. We are actively discussing this. Ultimately, our main focus is on how to establish enough overall capacity across our facilities to meet customer demand. We intend to remain flexible and assess what is best for both the business and our customers. Could you please repeat your second question?

Anthony Stoss, Analyst

Yeah, the 35 customers that you've sampled to, how many you had last quarter and if there's any new markets?

Harrold Rust, President & CEO

Yes. So I would say the funnel continues to grow impressively, it grew roughly $200 million during the quarter. I think growth is both broad across all the markets we've been targeting already. But I think we've also seen some new interest in a couple of segments. One is the industrial market where high energy density has a pretty high value proposition as well. And so that's one area which I think is new relative to what we've been seeing in prior quarters.

Anthony Stoss, Analyst

If I could just sneak in one other quick one just again on the new process. Is there a brand new equipment that you haven't dealt with in the past, and is there any kind of material additional lead times? I'm curious when you think you can have everything in and qualified for the new process.

Steffen Pietzke, CFO

Yeah, I think it's a combination. I think in some cases, these are improvements on equipment with existing vendors, where we've learned enough. We know we can make a much better piece of equipment. In some cases, we're looking at some new vendors as well. We're pretty far along in those discussions. So from a lead time standpoint, we have a good sense of what those are. And we believe that we'll have that first next-generation line on the ground and facility sometime in the first quarter next year. And have it producing revenue second quarter, which is consistent with what we've been saying for the last several quarters.

Anthony Stoss, Analyst

Very good. Thanks Harrold.

Steffen Pietzke, CFO

Thank you.

Operator, Operator

Thank you, our next question comes from Derek Soderberg with Colliers Securities. Your line is open.

Derek Soderberg, Analyst

Thank you for taking my questions. Regarding the second production line at Fab-1, you mentioned starting its installation late last quarter. What progress have you made with that line, and do you anticipate it will be fully operational and ready for battery sales by year-end? Can you provide a timeline for this? Additionally, will this second line incorporate the new manufacturing equipment, or will it be the last to utilize the previous-generation equipment? I apologize for the multiple questions.

Harrold Rust, President & CEO

We have two main production lines at our Fremont facility. The first line, which has been operational longer, produced the qualification cells we shipped in January and will be in production by the second quarter. The second line started later and will focus on qualification work for larger cell products throughout the summer. We expect this line to be ready for production deliveries by the end of the year once qualification work is complete. However, most revenue will come from the first line as it is currently producing the products we’re qualifying with customers. Regarding whether the second line is the last of the current generation, I would confirm that it is. While additional equipment is being added to support it, this is essentially the configuration we have, though there will be a few more components arriving. We have gained valuable insights, which will greatly assist us in designing a next-generation line that will be significantly improved. We look forward to applying what we’ve learned to grow the company with these upcoming lines.

Derek Soderberg, Analyst

Got it. And then as my follow-up, you guys spoke to sort of prioritizing customer qualifications and improving your manufacturing equipment ahead of scaling capacity, does that priority change the timeline to Fab-2, timeline to revenue there, just curious if that relates to that commentary is related to your joint venture licensing strategy and just trying to sort of bulk up the throughput of the equipment. Is that a good way to think about some of that commentary?

Harrold Rust, President & CEO

I see the partnership initiatives as running alongside our current efforts. Our primary focus is on ensuring the production lines we've developed meet their targets, while also working on the next generation line. Simultaneously, we are engaging regularly with customers and potential partners to explore avenues for faster growth. A significant aspect of this is our Fab-3 strategy, which we have previously discussed, aimed more toward the electric vehicle sector. We believe that forming joint ventures or licensing agreements is the appropriate method for entering that market. With the addition of Patrick Donnelly, he will assist in fostering discussions with key players in that space to advance those conversations.

Derek Soderberg, Analyst

Perfect. Thanks, guys.

Operator, Operator

Thank you. And our next question comes from Gabe Daoud with Cowen, your line is open.

Gabe Daoud, Analyst

Thank you for taking my questions. Regarding the manufacturing capacity and capabilities, Harrold mentioned that Fab-1 was initially expected to deliver 45 million cells a year. I'm curious about how many lines that projection assumes. Additionally, I would like to understand how many products you can actually deliver today with your existing lines.

Harrold Rust, President & CEO

Yes. So thanks for the question, Gabe. Certainly, we've talked about our ability to significantly ramp that capacity here. That's beyond the two lines that are in place and that would be something we would do in the future. Certainly consistent with our strategy for these next-generation lines, maybe the generation beyond the ones we have right now. I would say that our decision to increase the capacity here will judge over time as we look at how our Fab-2 strategy rolls out and whether it makes sense to do more here, less here, and more at some of these other locations. I think we want to be flexible on that with respect to where our customers are and what the opportunities are for these other locations. I think we'll adapt dynamically, and I'm sure whatever we would say today is probably slightly different than what we'll end up executing on. Ultimately, we just want to make sure we can deliver the overall capacity to meet our customers' needs.

Gabe Daoud, Analyst

Understood. Thanks, Harrold. Shifting gears a bit, could you discuss some of the cycle life data on the EV battery? I know there's a goal as part of the agreement to reach 1,000 hours per liter, but I was considering 700. Can you explain the energy densities of those cells in terms of one hour per kilogram? Also, are EV partners more focused on gravimetric or volumetric energy density?

Harrold Rust, President & CEO

Yes, I would say there is interest in both from a customer standpoint. It turns out that in cars today and in some ways the space is as valuable as the weight. The specific cells that we've built now, we're not super aggressive from an energy density standpoint, that somewhat on purpose, because the objective was to establish the long-term cycling capability of our unique 100% active silicon anode architecture. And I think thus far the data on that is pretty exciting. And I would say that people would struggle to show active silicon stuff in the past. It looks as good, so we're excited about that. We do believe that if we were designing to high-energy cells for that market, we could have a compelling product either from a volumetric or specific gravity standpoint. And we've had some data out on our website that talks about what that might look like.

Gabe Daoud, Analyst

Thanks, Charlie. And then I'm just curious, as those cells have cycled now and hit close to 800 cycles, how much did they swell, well was it sold like less than 5%? Thanks.

Harrold Rust, President & CEO

Yeah, I would say in general where the architecture and our unique strength system, we see very little actual swelling of the batteries.

Operator, Operator

Thank you. Our next question comes from Sean Milligan with Williams Trading. Your line is open.

Sean Milligan, Analyst

Hey guys, thanks for taking my question. As you look to build out the EV sales process and I know you're bringing on Patrick. Just curious if he's brought any with him, how that team is going to build out over the next year or two?

Harrold Rust, President & CEO

I don’t have the answers to those questions yet. Patrick is just starting, and I’m sure you have some ideas on how to develop that. I would like us to comment on how that will take shape over the next few quarters. However, I don't have the specific answers at this moment.

Sean Milligan, Analyst

Okay. And then on the EV side with the DOE program, I think you're testing NMC technology, if I'm correct. Have you sampled any cells with EV players with other technologies to this point?

Harrold Rust, President & CEO

Yes. So what we've done in the past, we have four standard sizes of batteries today, which are targeted more for the consumer electronics space. And so we've sampled cells from those fleet of batteries into the space already. Those tend to have a look in Cobalt oxide cathode as opposed to NMC. But it gives the customer in that space a good sense of what our technology is capable of and how it performs. And so that's something we've been doing over the last half year, if not longer.

Sean Milligan, Analyst

Right. I have one final question regarding the 35 customers you've sampled cells to. I'm curious if you can share the win rate for that product pipeline, and how long it generally takes from sampling to achieving first revenue.

Harrold Rust, President & CEO

I don't have the exact numbers available, and I don't think we've specifically commented on the different stages of the funnel. However, I can say that our success in converting leads at the bottom of the funnel is largely influenced by how well we engage with the current demand. This year, we are undertaking a significant initiative by investing in a next-generation pilot line that has approximately ten times the throughput of our existing line. This substantial increase in capacity will enhance our ability to deliver samples to customers. Additionally, the new line will be highly flexible, allowing us to handle a greater variety of custom designs more effectively. Importantly, it is designed based on the same production kernels as our next-gen manufacturing line. This design is aimed at reducing qualification time with our customers by aligning more closely with actual manufacturing processes, which will help eliminate the need for multi-step qualifications. We believe these factors will enhance our ability to push products to the bottom of the funnel and decrease the time-to-market for some customers. This initiative is crucial for the company and we anticipate it will provide us with a competitive edge moving forward.

Sean Milligan, Analyst

And the pilot line is mid-year or?

Harrold Rust, President & CEO

It will be coming in at the end of this year, right. So I would look at towards the end of this year that starting to have a significant effect on how fast we can engage with customers and move people down. And also give us a promise to be quicker in terms of converting opportunities into actual revenue.

Sean Milligan, Analyst

Okay, great. And then just one more, Harrold. In terms of the early customers that you've had in sort of the land-and-expand strategy, are you starting to see customers sample cells across different product lines? I know it, maybe you would have sampled with one product initially and now they're starting to bring into other products.

Harrold Rust, President & CEO

I would say in general; we've seen an increase in terms of customer traction across multiple customers. But even within specific customers, we're starting to talk with customers about follow-on products. The initial products are ready. Those discussions are happening, which is I think a very encouraging sign for their view of our relationship. And obviously, one of our decision factors around customers since we can't necessarily service everyone, is to pick customers where there is extending life and we can ride with these customers through multiple revolutions of products. And we're starting to see that stuff materializing.

Sean Milligan, Analyst

Okay, great. What is the target cycle life for the EV if you're currently approaching 800? What number of cycle lives do you aim to achieve?

Harrold Rust, President & CEO

The stated goal that the DOE set out in this program was 1,000 cycles. Right now we're just short of 1000 cycles with 20% fade or 80% initial capacity. Right now we're sitting just short of 800 and we've lost only about 4% of capacity. So we're pretty encouraged with those results and we think we'll have additional good news to report on that later.

Operator, Operator

Thank you. I'm currently showing no further questions at this time. I would like to hand the conference back over to Mr. Rust for closing comments.

Harrold Rust, President & CEO

Thank you all for joining us today and listening to our earnings call. We are very excited about our direction and the progress we've made over the past year. This journey has been significant for our company as we fundamentally change how our batteries are produced, and we believe we have demonstrated considerable progress. The shipping of qualification samples from our first production line marks a major milestone that sets us apart from many others in the battery industry who discuss technologies but have not yet commercialized them. We understand that bringing a product to life is what truly matters. We have a working product, we have proven our ability to manufacture it, and we have customers ready to adopt it, which positions us very well. We are looking forward to establishing an improved process moving forward. Each employee carries a badge that not only lists our core values but also embodies the vision for our company. Our vision is to ensure that every person benefits from Enovix Innovation every day. We are committed to achieving this and are enthusiastic about our ongoing journey and the advancements we are making. We hope to have you with us as we continue this path.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.